The trans-Atlantic pensions gap

Aug 17 2005 by Brian Amble Print This Article

Employer pension plans in the United States are four times more likely to be fully funded than occupational pension plans in the United Kingdom.

Research from Aon Consulting into the pension information of 200 of the largest UK companies suggests that only five per cent of UK pension plans are fully funded compared to 20 per cent of US pension plans.

Comparing information for the US and UK companies with total pension assets of around $800bn in the US and £350bn in the UK, the research found that, on average, the pension plan deficit of a US company represents around two months worth of profits (before tax), compared to seven months of profits for the average UK company.

However, what is more alarming is that around 25 per cent of companies in the UK have pension plans with a deficit representing over two years worth of profits, putting a significant strain on profitability, whereas fewer than five per cent of US companies are in a similar position.

One of the main reasons why UK companies have such problems is because their contribution rates are lower than U.S. companies, Aon said.

While U.S. firms have put in cash contributions of over 10 per cent of plan assets over the last two years ($90bn), the figure for UK firms is only seven per cent (£25bn).

Aon Consulting's Andrew Claringbold said that while employers' contributions to UK pension plans have doubled over recent years, this was insufficient to compensate for a combination of falling bond yields, increasing life expectancy and poor equity performance.

"The fall in bond yields has had more of an impact in the UK than in the US. This is because benefits for most leavers and retirees in the UK have to be increased each year in line with the retail price index," he explained.

"Therefore, the amount of money required in the pension plan to meet these benefits is more susceptible to longer-term interest rates. This is not a standard pension requirement in the US.

"More generally, UK companies have not increased their level of cash contributions to the same extent as their counterparts in the US," he added.

"Therefore, there continues to be a great deal of pressure for pension plan cash contribution levels to remain at least as high as they are currently in the UK."

Figures from actuaries Lane, Clark and Peacock released last week suggest that while the combined pension deficit of the UK's top 100 companies has fallen from £42bn a year ago to £37bn, it will still take at least eight years to plug the deficit.

And although company pension contributions increased to record levels in the UK last year, nearly half of all FTSE 100 companies still awarded their shareholders dividends in 2004 that were greater than their pension fund deficits.

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